Opinion
Jobs and Skills

These 11 charts show how an ageing population can lead to structural issues in labour supply

Demographics are rapidly changing labour supply in many developed countries.

Demographics are rapidly changing labour supply in many developed countries. Image: Unsplash/Nick Staal

Silvia Ardagna
Head of European Economics Research, Barclays Corporate & Investment Bank
Marc Giannoni
Chief US Economist, Barclays Corporate & Investment Bank
Jonathan Millar
Senior US Economist, Barclays Corporate & Investment Bank
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Jobs and Skills

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  • Working behaviours are changing in certain developed countries as populations age, with many workers nearing retirement.
  • Governments need to consider how and when to intervene to avoid a potential slowing of the economy as the labour supply tightens.
  • Technological advances and increases in human capital and investment could help limit a drag on the economy, but action is needed.

As populations in certain developed economies age, their working behaviours are also shifting.

These changes are fundamentally altering labour supply, prompting governments to consider how and when to intervene to avoid a potential slowing of gross domestic product (GDP).

Here, research analysts at Barclays Corporate and Investment Bank examine the important signals within this long-term trend in six nations.

Global population wave impacting labour supply

For several decades, population growth has been a key driver of increasing labour supply. However, this trend is reversing, as the bulk of workers nearing retirement age in many countries inevitably age out of the workforce.

Looking at data from six countries – the United Kingdom, the United States, France, Germany, Spain and Italy – Barclays’ research analysts have identified a clear shift in population distribution by age as the current peaks of 50-to 65-year-olds transition into retirement in the next 20-25 years.

The population wave in six developed countries is impacting the labour supply.
The population wave in six developed countries. Image: Barclays Research

The issue of such high numbers ageing out of work is compounded by the fact that overall population growth is slowing, and is on course to plateau in the US and the UK, and become negative in the Euro area.

Predicted population growth in the United States.
Predicted population growth in the United States. Image: Barclays Research
Predicted population growth in the United Kingdom.
Predicted population growth in the United Kingdom. Image: Barclays Research
Predicted population growth in the Euro area.
Predicted population growth in the Euro area. Image: Barclays Research

Since at least 2015, several Euro area countries have been experiencing negative natural population growth – defined as births offset by deaths, not including migration. Germany’s natural population, for example, has been decreasing by about 100,000 people per year since the 1990s.

While natural populations are not yet declining in the US and the UK, both are projected to in 10 and 20 years, respectively. This means a smaller pool of potential entrants into the workforce to replace those who are reaching the usual age of retirement.

Shifts in labour participation rate

Of course, population figures are only one lens through which to view labour supply. To get a more comprehensive view, it is crucial to consider the labour force participation rate (LFPR), or the share of the population active in the labour market, which reveals added complexity to the labour supply issue.

Data show that in all countries studied, except for Italy, total hours worked per year have increased over the past two decades. However, the number of hours worked per person has decreased over the same period. So, more individuals are working, but each is working less.

Total hours worked in six developed economies.
Total hours worked in six developed economies. Image: Barclays Research
Annual individual working hours are dropping.
Annual individual working hours are dropping. Image: Barclays Research

Looking at the LFPR across different demographic groups, as shown in the chart below, it is notable that several countries currently have above-average participation in both the 15-19 and 65+ brackets. Traditionally, these age groups would not be working yet, or would have retired already.

Although younger cohorts in the US, the UK and Germany are remaining in school for longer, they appear to be blending their studies with work more than those in France, Spain and Italy.

Likewise, larger numbers of people nearing retirement in the US, the UK and Germany are delaying their exit from the workforce than in France, Spain and Italy.

Labour force participation rate in six developed economies.  labour supply
Labour force participation rate in six developed economies. Image: Barclays Research

Possible reasons for these trends vary. Those working fewer hours may be taking advantage of increases in real wages over the years. Higher wages provide better opportunities to enjoy more leisure and arrange work around a preferred lifestyle, with less sacrifice in terms of foregone purchasing power. Others may be unable to work as much as they’d like due to structural or personal barriers.

The experience is similarly mixed for those newly entering the workforce or remaining in it longer. Some need to remain in the workforce longer because they lack the wealth necessary to afford full retirement or because of variations in government pensions.

At the same time, variations in access to childcare and the availability of flexible working arrangements affect whether people can enter or remain in the workforce.

Gender balance in labour force participation

There are also some significant patterns across the gender divide when it comes to increasing or decreasing labour force participation.

For males, the story is a mostly uniform one of general decline with a recent uptick. Participation rates among male cohorts aged 15-54 had seen a steady long-term downtrend before increasing modestly in the last couple of years. For 55+ cohorts, this recent increase is more pronounced.

Comparative men and women participation rate in six developed countries (age 55+).
Comparative men and women participation rate in six developed countries (age 55+). Image: Barclays Research

For females, the story is different. Again, there is a general decline among the 15-24 cohort as people spend longer in education.

But there are steady increases in participation in most countries amongst the 25-54 group, and, often, dramatic rises within the 55+ cohort, consistent with effects of gender-based structural culture shifts, higher educational attainment, and lower birth rates.

However, these favourable trends for females may be running their course and will not necessarily fill labour supply gaps from population ageing.

Comparative men and women participation rate in six developed countries (age 25-54).
Comparative men and women participation rate in six developed countries (age 25-54). Image: Barclays Research

Intervention needed on labour supply

Although overall participation rates are increasing, thanks to tight labour markets attracting people into employment, this cannot continue forever, given the inevitable effect of ageing populations on labour supply.

Without intervention, labour supply in developed economies will be significantly affected as people reduce the amount they work and are not replaced through natural population growth.

Governments could offset this decline in several ways, such as through policies to encourage migration, increase birth rates and delay the retirement age.

But these approaches may either face resistance or, in the case of pro-fertility measures like increased child benefits or tax incentives, have questionable long-term efficacy.

National government-provided retirement benefits are being recalibrated across most countries surveyed to encourage later retirement. However, there has been considerable pushback against these measures in several countries, including public protests.

Retirement benefits are being recalibrated to encourage later retirement.
Retirement benefits are being recalibrated to encourage later retirement. 'Future' refers to the eligibility age, as of 2020, for full retirement benefits from all mandatory components (without any reduction), for those starting a full career at age 22. Educational credits are not included. For Italy, the current normal retirement age is based on 'quota 100’, a temporary measure introduced for 2019-21 that allows earlier retirement. Image: Barclays Research

Likewise, all the countries examined have benefited from various forms of migration over the last 10-15 years. Migrants tend to be younger and have higher fertility rates, so are, therefore likely to be net contributors to longer-term increases in the workforce.

Key migration flow.
Key migration flow. Image: Barclays

Why labour supply issues need addressing

It is clear that labour supply within developed economies will slow, or even decline if these structural issues are left unaddressed. The deeper impact remains to be seen, especially in terms of GDP growth.

How this will affect real neutral interest rates remains highly uncertain, but over the coming five years, demographic dynamics might suggest lower rates.

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What is the World Economic Forum doing about including older people in the workforce?

However, with populations potentially hesitant about possible solutions to this problem, governments may find it challenging to arrest projected declines.

That said, there are potential routes that may mitigate the drag. Technological advancements and increases in human capital and investment could boost productivity growth and limit the impact of declining work hours on GDP.

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